Context Matters

"Past ideas may be tendentiously misrepresented.  This may be done by stating/implying that earlier thinkers were trying to solve our problems, and/or by using today's terminology in describing their work.  It's all too easy to project our own concerns onto ancient writings that bear some superficial resemblance to ours, in order to make a progressivist story appear more plausible." Margaret Boden, "Mind as Machine" pg 19

Any good argument will have three main parts to it:  a logical structure, relevant data, and a conclusion that follows from the first two.  Far too often, people tend to concentrate on the conclusion and ignore the other parts. Obviously, that is flawed. If you disagree with another person's conclusion, that means you either disagree with that person's logic or that person's data.  If you wish to change someone's conclusion, then you need to change either that person's logic or that person's data.  Either way, you'll need to examine both.

The logical structure of an argument tends to be straightforward. A causes B, B causes C, therefore A causes C.  I do not feel any pressing need to go into logic at this time, though I may under a different occasion.  If you do feel an urge to reexamine how logic works, I suggest Richard Feldman's Reason and Argument. It's an excellent introductory text.

On the other hand, data and the context we find it in is something I'd like to explore in this post.  A little over two weeks ago, my friend Andrew posted this on his Facebook wall under the headline "Welcome to America":

The implication was, of course, that it is unfair that the top 1% of taxpayers pay as much in taxes as the bottom 95%.  A surprisingly large number of my friends ended up posting comments, usually along the lines of: "Just cause your successful does not mean you should pay a ridiculous amount... fucking liberals" and "Such garbage."

According to the data Andrew published, 1% of the population was hauling as much weight as 95% of the population. According to my friends, that's ridiculously unfair and just another example of how the rich are being punished by our government. That's not exactly true, though.

My reply was a little different. My first comment ran at two paragraphs. I'll divide it into parts here and go into greater depth just for excessive clarification.

The first paragraph: "So... you're saying that the same people who own 58.9% of the total wealth in America (top 5%, see link below, also note, my data is 6 years old, since then the gaps have grown wider) pay roughly 55-60% of the taxes?"

Followed immediately by: "That strikes me as... actually, completely reasonable."

My data in this case comes from Fairfield University.  According to that data, in 2004 the top 1% owned 34.3% of total wealth and the next 4% owned 24.6% of total wealth for a combined top 5% owning 58.9% of total wealth.  According to the data Andrew himself posted, that same group paid roughly 55%-60% of taxes in 2010.  A group paying taxes in proportion to what they own does seem reasonable.  However, a debate could arise over whether it is fairer to tax people in accordance with their wealth or their income. In order to head off this debate, I included this second paragraph in my first comment:

"And just to preempt the inevitable wealth v. income debate, I turn to Alan Greenspan, former chairman of the Federal Reserve Bank, making the case for wealth: 
"Ultimately, we are interested in the question of relative standards of living and economic well-being. We need to examine trends in the distribution of wealth, which, more fundamentally than earnings or income, represents a measure of the ability of households to consume."

 Context, bitches. It matters."

My friend Ethan was the next to reply, posting this:

"I actually think Jack has a point. Most of those sort of websites are propoganda for one political part or another. You rarely see a comparason of tax burden relative to overall income. Though I do think some sort of flat tax would be the best solution."

To which I replied:

"I'd have to disagree, Ethan. The flat tax is inherently regressive because the marginal dollar is worth more to the low income household than the high income. 

I propose a graduated sales tax, where the most expensive items (e.g., a $20 mil. yacht) are taxed at high rates, and the cheapest, most necessary items (ramen noodles and other food stuffs), are taxed at either nothing or something close to it.


I'd feel really clever right now, except that it turns out Prof. Steven Landsburg proposed the same damn thing nearly three years ago:
http://www.slate.com/id/2181833/"

At this point, Andrew weighed in again:

"[...] flat taxes are not a good idea. A non-graduated consumption tax would be my vote. It still would end up being progressive, but not nearly as severe as today's setup. It's nice because if you should decide to spend more money, you'll be taxed more."

Before I allow his quote to continue, I have to point out the above comment is fallacious.  A non-graduated consumption tax implies just a flat sales tax on both goods and services.  A flat tax is almost always regressive (meaning that it tends to have the poorer pay proportionally more than the wealthy). The reason is that every person usually has to spend a certain lump sum every period just in order to live. This is the cost of living, and it's almost the same from person to person.  We all consume roughly the same amount of food, electricity, and water per person just for our basic needs. Everything above and beyond that is to satisfy a luxury.  But what this means is that the basic cost of living is a significantly larger percentage of a person's total wealth the poorer that person is. With no taxes at all, the system is inherently regressive.  The wealthier a person is, the larger the wealth percentage will be that that person is able to reinvest, making that person even wealthier.   The flat tax increases the proportion that everyone spends by the same percentage, or looking at it from a different angle, decreases the proportion that everyone saves by the same percentage.  This means that there is no difference between a flat tax and no taxes when it comes to a re-appropriation of wealth.

Now, in the interest of covering my ass so that this post won't come back to haunt me later, I have heard arguments on the graduated income tax that state: " I’d be curious as to what grounds one might use to support a graduated tax? It fails on economic efficiency grounds. It fails on moral grounds. It fails on the principles of liberty. It certainly fails on property rights grounds. It has failed (certainly with steep escalation) to even achieve any of its distributional goals, so that even if liberty were not important, or morals were not important or efficiency were not important, it has been demonstrated time and again to not achieve its stated objective" - my Economics Professor

I have not read the data behind those claims, so I'm unable to say what my opinion is on them.  Which brings me to a critical point on context and data: If you don't know anything about the data at hand, stick to what you do and admit what you don't.  But at the same time, that has little to do with the thrust of this debate, which is: Is our current tax system unfair to the wealthy?

Unfortunately, Andrew seems to have not bothered to read what I wrote before, especially when he commented:


"Jack, your argument is interesting... looking at taxes based on wealth instead of income could almost be seen as wanting to unfairly tax those who save their money."

Technically, this is true, but I refer back to my Alan Greenspan quote for why it makes more sense to base taxes on overall wealth than on income.

 "Yes, most would be in the top income brackets, but the system currently in place almost incentivizes spending every dime..."

Again, also true. The capital gains tax does decrease the marginal benefit of saving, which is why I suggested switching to a sales tax. The sales tax would incentivize saving over spending.

Andrew ended our argument on this note:

"Maybe this is simply America becoming ever more uncompetitive globally and only those who are extremely hard-working & intelligent can expect to command more of the wealth in the U.S.. Those who can't keep up are simply left behind on welfare, which is then paid for by those who became successful... Did you know for every $1 earned with income below $24,000, they get back $8.21 in benefits? Above $100,000 income you are receiving $0.41 back per year. The message to America? Don't earn more than $100,000 because you don't deserve it. "

My first reaction was to dismiss the first line.  To assume "this is simply America becoming ever more uncompetitive globally" is a huge assumption, especially without any data on hand.  First, what does he mean by uncompetitive? Does he mean by standard of living? By GDP? By manufacturing output? By Olympic Gold Medal wins?

Second, how is that tied in with our argument on taxes? Is he saying that our tax rate makes us more uncompetitive? Since that’s what he’s been arguing the entire time, his opening line doesn’t provide any new information. It only exists to rhetorically color the debate to make his ideas seem more sympathetic.

So, I dismiss the line as being irrelevant.

But then the second part emerges. I was aware that people who paid less in taxes tended to get back more in benefits per dollar paid than people who paid more. In fact, I assumed it was logical. Assume that benefits are uniformly distributed (this might not be exactly true, but it's probably close enough).  Everyone has roughly the same access to roads, fire departments, police and military protection, justice under the law, voting, etc as everyone else. So, the government probably spends roughly the same amount providing benefits for every person.  But, as heavily debated above, different people spend wildly different amounts in taxes. All that Andrew is showing by that statement is that the wealthier pay more in taxes than the poor.

So where do I stand on Andrew's conclusion?  His belief is that the wealthy are unfairly punished by our current tax system.   My analysis of the data that he presented, and further exploration into its context, indicates to me that the wealthy are taxed in rough proportion with their own wealth, which is about as fair of a tax system as I can think of.  Does that mean that I think the tax system is perfect, or that there aren't other systems that might work better? No, and on top of that, I did briefly outline one above that I think would be better.

The trouble, I feel, is that Andrew relied very heavily on assumptions that he didn't realize he was making. Assumptions that he used in place of data and that have been handed down to him through previous sources. There were other times in American history when the tax system did unfairly punish the wealthy, and during those times, many excellent arguments were presented against them. These arguments, Andrew probably read, or read accounts of them, and assuming the conclusions for them were still correct, substituted them for his own conclusion and then cherry picked data to support it.

This is not meant to be too critical of Andrew. He is a good friend, and I'm sure that I make the mistake many times myself, and probably have a couple times in this post.  But, I hope this example does illustrate the necessity of examining the conclusions we hold and the arguments that support them.

Finally, how does this all tie in with the quote by Margaret Boden that graces the top of this post? It is, I admit, a bit out of place, but it does tie in well with the overreaching thought.  Too often, we borrow conclusions from others and fit them into our own prearranged patterns without examining how well those conclusions apply to our current situation.  The superficial similarities between our problems and problems people have had in the past makes it all too tempting to assume they are the same, and as my little discussion with Andrew shows, will occasionally lead to fallacious claims.

The context of the data we choose is often as important as the data itself. Failing to properly examine not only the logical structure of another person's or our own arguments but the data presented and the context it is presented in undermines debate and makes rational argument impossible.